Bangkok--12 Apr--Moody's Investors
Moody's Investors Service has today assigned a first-time sovereign rating of Ba3 to the People's Republic of Bangladesh. The outlook is stable.
The Ba3 foreign and local-currency sovereign bond ratings broadly incorporate Moody's assessment of Bangladesh's reasonable degree of financial and balance-of-payments robustness which, coupled with prospects for continued macroeconomic stability, reduces the likelihood of severe stress on the country's creditworthiness.
"The combination of a conservative institutional framework for managing the economy, supported by capital controls, has ensured better external balance and price stability than at many other emerging markets at a similar stage of development," says Aninda Mitra, a Moody's Vice-President and lead sovereign analyst for Bangladesh.
"Policy stability and underlying demographic shifts coupled with steady increases in trade openness have aided a remarkably steady rate of economic growth averaging 6% over the past decade," said the Singapore-based analyst, adding, "The economy has also ably withstood several recent external shocks, periods of domestic political stress and supply-side bottlenecks."
Mitra attributes this resilience to the robust growth of family-based remittance inflows and the growing role of micro-finance institutions. These have offset the vagaries of subsistence level per-capita income by supporting domestic consumption and helping to develop a critical social safety net. Despite its medium-size economy and evidence of recent economic dynamism, Bangladesh's relatively high industrial and export dependence on the ready-made garments (RMG) sector is a ratings constraint.
"However, in the medium term, a broader process of sustained industrial diversification, supply-side and financial sector reforms, and regional economic integration may help reduce infrastructure rigidities and alleviate concentration risks," notes Mitra.
Bangladesh's relatively robust external position, and especially its strong foreign currency reserve adequacy, compares favourably with most other Ba and single-B-rated peers. According to Mitra, these reflect Bangladesh's recent dynamic RMG exports, large remittance inflows, minimal foreign commercial borrowing, and advantageous external debt servicing profile.
Mitra also notes that the government's debt dynamics are supported by the gradual strengthening of GDP growth rates, a stable-to-appreciating real effective exchange rate, and a readily finance-able budget deficit.
"However, despite the generally positive trends in the government's debt trajectory, debt affordability and fiscal flexibility face more pressure than do most of its rating peers," he adds.
Bangladesh's low debt affordability is reflected by interest pressures in the budget that exceed most Ba- and B-rated sovereign credits. Relatively higher interest payments as a percent of government revenue is derived from low revenue collection which amounts to only 12 percent of GDP, and occurs despite the sizable proportion of very low interest 'concessional debt' owed to official creditors. However, another reason for the high interest to revenue ratio is the government' ability to finance more than half of its deficit in the local debt market, where financing costs are relatively high.
The lack of fiscal flexibility is also reflected in a high government debt-to-revenue ratio of 350 percent, resulting, once again, from shortcomings in revenue generation. Nonetheless, in the event of an unexpected fiscal shock, debt roll-over risk will likely be contained by the government's cash balances in the banking system and by the country's respectable savings rates that should provide greater debt absorption capability than at most other single-B rated sovereign credits and even some Ba3 peers.
Bangladesh's impending tax reforms in the forthcoming fiscal year are particularly important in supporting its credit outlook. "This will not only support improved fiscal flexibility and debt affordability, but the reforms will also underpin much-needed expansion of public development expenditure," says Mitra.
Contingent fiscal pressures from the performance of -- or outstanding guarantees to -- non-financial state-owned-enterprises are relatively low. Although banking system fundamentals are relatively weak, though, improving, banks are not reliant on external funding and are unlikely to pose serious contingent sovereign risks.
"The government's absolute parliamentary majority should support a broad emphasis on economic reforms, regional integration and political reconciliation" adds Mitra, noting, "nonetheless, narrow identity or ideological politics, and capacity constraints in state institutions may slow the pace of reforms but are unlikely to derail the economic policy framework."
In conjunction with the first-time sovereign rating, Moody's has also assigned Bangladesh a foreign currency bond ceiling of Ba2 and a foreign currency bank deposit ceiling of B1. These reflect a medium likelihood of an external payments moratorium in the event of a deterioration in the sovereign's external creditworthiness, and a stronger likelihood of bank deposit controls.
Additionally, Moody's has assigned Bangladesh long-term local currency bond and deposit ceilings of Baa3, reflecting the broader financial, political and legal country risks faced by locally-funded or domiciled credit transactions.
The principal methodology that Moody's uses in rating the People's Republic of Bangladesh is 'Moody's Sovereign Bond Ratings Methodology,' published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
Singapore Aninda S. Mitra
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308